PE Ratio Shows That Today’s Stock Market Is Very Expensive

Considering the market heights of the recent past, it may not feel like the market is expensive. It might feel downright cheap. After all, the Dow Jones Industrial Average is hovering near 9,300 and the S&P 500 near 1,000, levels just two-thirds of indexes former glories.


Throw in the earnings factor and suddenly, those levels look particularly high – and that is the subject tackled by the folks over at Chart of the Day.

The COT guys examine price-to-earnings ratios since 1936 and what they find does not bode well for investors long in the market today.

From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.

By David Weidner
August 21, 2009, 10:28 AM ET

Source: The Wall Street Journal

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